Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2016, Rhone-Metro leased equipment to Western Soya Co. for a four-year period ending December 31, 2020, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost $280,000 to manufacture and has an expected useful life of six years. Its normal sales price is $320,273. The expected residual value of $16,000 at December 31, 2020, is not guaranteed. Equal payments under the lease are $89,000 (including $4,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2016. Collectibility of the remaining lease payments is reasonably assured, and Rhone-Metro has no material cost uncertainties. Western Soya’s incremental borrowing rate is 10%. Western Soya knows the interest rate implicit in the lease payments is 7%.
Prepare an amortization schedules describing the pattern of interest over the lease term for the lessee and the lessor.
|Lessee (unguaranteed residual value excluded):|
Lessor (unguaranteed residual value included):
Same as table above but add 2020
Let X = Amount of each annual payment (excluding executory costs)
PV of annual payments: 4 payments @ 7% = 3.6243 x X
PV of unguaranteed residual value: 4th period @ 7% = 0.7628 x $16,000 = $12205
3.6243X + $12205 = $320273
3.6243X = $308,068.
X = $308068/3.6243 = $85000(rounded off)
$85000 + $4,000 = $89,000.
Western Soya Co. (Lessee):
1.) Leased asset Dr $308,068
Lease payable Cr $308,068
2) Lease payable Dr $85000
Prepaid lease expense Dr $4,000
Cash Cr $89,000
1)Lease receivable Dr $320273
Cost of goods sold Dr $267795 ($280,000 – $12,205)
Sales Cr $308,068 ($320273 - $12,205)
Equipment Cr $280,000
2) Cash DR 89,000
Executory cost payable Cr 4,000
Lease receivable Cr 85,000